Private equity’s warning shot — hike taxes on executives’ payouts and we’ll walk — seems a far emptier threat when Central London is itself pretty empty. Do wholesale financial services even need to be in London anyway?
Economist Michael Porter asserted that business clusters breed economies of scale, professional networks and creativity. Examples include talent-rich hubs like Silicon Valley and Hollywood — and, yes, the City of London and Wall Street. In a cluster, you can schmooze the powerful, pitch to investors and run term sheets past lawyers, all within a few square miles.
Six months of lockdown and its aftermath have challenged that wisdom. On the face of it, global capital has had no real problem working from home. Speak to titans of industry and finance privately and a different picture emerges. Deals have been lost. It is tougher to raise a bid when the smartest people in the room are all in different rooms.
Personal relationships, forged in coffee houses for centuries, are the lifeblood of business. “If you take away City lunches you are commoditising your service,” says one boss. The value of a cluster — and of a business — is generated partly by the chance interactions that homeworking discourages.
Geoffrey Garrett, at the time dean of Wharton, struck an apocalyptic note in a May blog post on de-urbanisation. If remote working weakens agglomeration benefits, it could also lessen local comparative advantage. Disgruntled hedgies who decamp from London might stay in their tax havens, instead of boomeranging back again.
Successful clusters tend to have grown up naturally. Clusters decreed or fostered by government often fail, as London’s unimpressive “Silicon Roundabout” district illustrated. Ministers may therefore feel rattled by the reflexive resistance of buyout bosses to the possibility that their carried interest might be taxed as income rather than capital gains.
Giving in to blackmail is never a good look. A better way for governments to bolster clusters is to nudge businesses gently back into safe, socially-distanced offices.
The barbarians at the gate themselves appear — for all the rhetoric — to be committed to staying. Buyout firms are ponying up for taxi fares and Covid-19 tests. Besides, as one economist asks, if keeping a lid on taxes was the determining factor, shouldn’t they all be working from yachts off Monaco?
The Lex team is interested in hearing more from readers. Please tell us what you think of the impact of homeworking on doing business in the comments section below.
Get alerts on London when a new story is published